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ANNUALREPOR T 2012

S T E A M S H I P S T R A D I N G C O M PA N Y L I M I T E D

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PIONEERING SUSTAINABLE PROGRESS

Steamships Trading Company has a 94-year tradition of investing in Papua New Guineasgrowth, development and progress. Its transition from pioneer coastal trader to a diversifiedleader in shipping, transport, property, manufacturing, hotels and information technologyhas been integral to, and part of, Papua New Guineas development. More recently thatdevelopment has accelerated so that Steamships is triple the size it was ten years ago andPNG has become a modern and formative leader within the Asia Pacific region.

Committed to our people, the sustainability of our operations, and the future of Papua NewGuinea, Steamships Trading Company is pioneering sustainable progress in PNG for the nextgeneration of stakeholders.

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2 Steamships Trading Company Limited

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3ANNUAL REPORT 2012

Brief Profile of Steamships Trading Company Ltd . 4

Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Chairmans Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Directors Economic Analysis . . . . . . . . . . . . . . . . . . . 10

Directors Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Steamships Shipping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Consort Express Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

East West Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Property and Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Pacific Palms Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Coral Sea Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Laga Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Datec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Pacific Towing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Colgate Palmolive (PNG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Steamships Sustainability Focus Areas . . . . . . . . . 37

Our People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Our Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Our Community. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Corporate Governance Statement . . . . . . . . . . . . . . 53

FINANCIAL SECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Statements of Comprehensive Income . . . . . . . . . . . . . . 58

Statement of Changes in Equity. . . . . . . . . . . . . . . . . . . . . 59

Statements of Financial Position . . . . . . . . . . . . . . . . . . . . 60

Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Notes to and Forming Part of the Accounts . . . . . . . . . 62

Independent Auditors Report to the

Shareholders of Steamships Trading

Company Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Directors Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Table of Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Stock Exchange Information . . . . . . . . . . . . . . . . . . . . . . . . 96

Company Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBC

Contents

ANNUALREPOR T 2012

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Steamships Trading Company Ltd (Steamships) is a PapuaNew Guinean success story. Today Steamships is a well-established business conglomerate with diversecommercial interests and public shareholding listings onboth the Australian Securities Exchange and the PortMoresby Stock Exchange; a fact that belies its humbleorigins.

The Steamships story began in the early years of the 20thcentury in what was then one of the least known parts ofthe world. The Company was founded by retired SeaCaptain, Algernon Sydney Fitch, to run salvageoperations in Australia. A dynamic, dedicated andprogressive man, Fitch was not averse to taking risks.Before too long he sailed the Companys first ship, the SS

Queenscliffe, to Port Moresby to trade along the Papuancoast. In 1924 the Public Company was formed and theSteamships story had well and truly begun. It was to benot only the story of the Company and the Group, but ofthe formative years of Papua New Guinea, for thefortunes of the Group and the country have, from thefirst, been closely intertwined.

At each stage of the economic development of thelargest nation and economy in the South Pacific,Steamships has fostered businesses and industries thathave helped build PNG. The Group has boosted localeconomies through businesses initially established inPort Moresby, the gulf and western reaches of the formerterritory of Papua and later in New Guinea and the

Brief Profile of Steamships Trading Company Ltd


Pacific Towing

Colgate-Palmolive

(PNG)

Datec

LagaIndustries

KEY JOINT VENTURES

STEAMSHIPS HEAD OFFICE

STEAMSHIPS ORGANISATIONAL STRUCTURE

COMMERCIAL DIVISION

LOGISTICSDIVISION

SteamshipsShipping

ShippingAgents

StevedoringCompanies

Pacific PalmsProperty

PROPERTY ANDHOTEL DIVISION

Coral SeaHotels

CoastalShipping

East WestTransport

ConsortExpress LinesF

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Highlands. As the country started to develop and exploreits rich and diverse endowment of natural resources,including plantation crops and mining, the economyrequired companies with the vision and energy ofSteamships to supply coastal shipping services. Inresponse to new opportunities, Steamships diversifiedinto hotels, manufacturing, distribution and otherservices, all while continuing to supply the shipping andstevedoring services that are necessary if PNG is tocontinue to generate the economic growth required tomeet the needs of its rapidly growing population.

In 2012 Steamships annual revenues surpassed theK1 billion mark for the first time and the Group had netassets of over K761 million. The Group employs over3,700 PNG citizens and non-citizens in seven diversedivisions grouped under the three operating categoriesof Logistics, Property and Hotels, and Commercial. Itcontinues to uphold the Group philosophy which aims tooffer quality, competitive goods and services to all itscustomers; provide safe, secure and challenging careers

for its staff; maintain the highest business ethics at alltimes; minimise its impacts on the environment; makepractical efforts to improve the lives of the communitiesin which it operates; and earn superior returns for itsshareholders.

Steamships is aware of its pre-eminent position in thecommunity and its responsibility to serve thatcommunity. The Group continues to be one of PNGslargest private sector employers and one of the largestsupporters of community initiatives in education, health,environment and social welfare. Steamships ensures thatcore sustainability concepts are embedded in its businessmodels and systems. Steamships cannot succeedwithout the engagement and support of the people itemploys, the loyalty of and satisfaction of its customers,the local communities and the environment in which itoperates.

Over 90 years on, Steamships is still showing it has theresources and capacity, vision and capability to meet thedynamic needs of a growing and vibrant country.

Brief Profile of Steamships Trading Company Ltd (continued)

5ANNUAL REPORT 2012

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Financial Highlights


2012 2011 Change

K'000 K'000

Revenue 1,038,195 934,717 11.1%

Operating Profit 296,509 265,116 11.8%

Profit attributed to shareholders 177,700 158,261 12.3%

Cash generated from operations 266,866 252,509 5.7%

Net cash inflow/(outflow) before financing 28,452 36,267 (21.6%)

Shareholders funds 677,178 578,549 17.0%

External borrowings 461,253 379,088 21.7%

2012 2011

Note Toea Toea

1. Earnings per share 573 510 12.3%

Dividend per share 285 190 50.0%

Shareholders funds per share 2,183 1,866 17.1%

Note 2012 2011

2. Gearing ratio percentage 40% 41%

3. Interest cover times 9.6 8.5

4. Dividend cover times 2.0 2.7

Notes

1. Earnings per share have been calculated by dividing the profit attributable to shareholders by the weightedaverage number of shares on issue during each year.

2. Gearing represents the ratio of debt to net debt plus equity.

3. Interest cover is calculated by dividing operating profit by net finance charges.

4. Dividend cover is calculated by dividing profit attributable to shareholders by the total dividends declaredand proposed during the year.

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2012 was a challenging year for PNG. A general electionmidyear, a slowdown in key export markets, financialinstability in Europe and falling commodity prices all ledto a weak first half year for Steamships. A decisiveelectoral result provided greater business confidence inPNG, while the subsequent budget and good progresson the establishment of the LNG project led to a strongersecond half. This also provides greater confidence for thenext few years.

Steamships revenue for the year grew by 11 per cent toK1,038 million, with profit after tax attributed toshareholders increasing by 12 per cent to K178 million.The Property and Hotels Division performed well, withcontinued growth in revenue and profits and newindustrial and commercial properties, as well as theGrand Papua Hotel, adding to Steamships extensiveportfolios. In spite of this, increased competition createdby the current building boom is putting pressure onoccupancies and lease and room rates. After a slow start,the manufacturing business registered an encouragingyear of growth driven by improved efficiencies, while theIT Division recorded improved revenues in what was aperiod of significant industry change. Steamshipslogistics businesses were weaker in 2012 due tocongested wharf infrastructure, a general slowdown inprojects and increasing competition on coastal trades.East West Transport road haulage was the exceptionthough the Highlands Highway remains a significantchallenge.

Steamships performance was built upon a whole-of-group focus on cost management, improved efficienciesand strategic investments. A strong commitment toproviding world-class customer service, to improving theskills and capability of our employees and to increasingthe health and welfare of our communities stood theGroup in good stead throughout the year. Capitalexpenditure in 2012 was K203 million; K76 million or 37per cent of this was allocated to new investments whichwill come on line over the next three years.

PNG continues to develop strong agricultural andresource-based export trade, although these have beenhit hard by appreciation of the PNG currency and fallingcommodity prices. Between March 2011 and March 2012,the Kina appreciated by close to 20 per cent against theUS dollar an extreme rise.1 In 2012 the position was lesssevere, although appreciation was still estimated at closeto 9 per cent for the first three quarters of the year.International spot prices for PNGs major resource exportcommodities (gold, copper, oil) were volatile throughout2012, with copper in particular down from its 2011 peaks.Major agricultural exports of cocoa, coffee, copra andpalm oil ended 2012 at prices that were significantlybelow 2011 levels. The challenges these trends presentfor companies operating in PNG are examined in theeconomic analysis elsewhere in this annual report.

The successful conduct of general elections in mid-2012marked a positive step towards improved stability for thecountry. Buoyed by a comprehensive victory at the polls,Peter ONeills Peoples National Congress partyestablished a strong coalition government and formedan experienced and responsible cabinet. From thesefoundations the Government has moved forwardstrongly, having identified that PNG needs to broadeneconomic growth and lift productivity, particularly in theresource sector. The 2013 National Budget includes a 50per cent lift in spending for health, education, and lawand order. It also commits an additional K12 billion inexpenditure over the next five years to infrastructuresuch as roads, highways, ports and airports. Steamships isstrongly supportive of these measures. In addition todirectly improving the efficiency of many of ourbusinesses and thus reducing the cost to our customers,it will improve the skills and living conditions of our manyemployees.

Just as the economy must be sustainable, so mustindividual company activities. Last year our annual reportset out a framework to demonstrate our performanceagainst some of the key indicators developed by theGlobal Reporting Initiative (GRI), the worlds leading

Chairmans Report

7ANNUAL REPORT 2012

1 Source material related to the content of this report is available upon request from Steamships Public Relations unit.

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Chairmans Report (continued)

sustainability benchmark. Data related to our economiccontribution to society, environmental stewardship andthe development of our people was collected andreviewed. This process continued in 2012. A review ofongoing efforts to manage our sustainabilityresponsibilities is featured in this report.

At Board level Steamships underwent a significantchange at the end of 2012, with the retirement of DavidCox as Managing Director. David joined Steamships in1992 as hotels beverage manager, rising to ManagingDirector in 2004. David led Steamships through a mostextraordinary period of growth for the Group despiteperiods of considerable government and societalinstability in PNG. Davids skill, dedication andachievement served shareholders and the Groupextremely well throughout his tenure. As announced toshareholders in May 2012, David accepted the invitationto continue as a non-executive director on theSteamships Board.

Geoffrey Cundle assumed the role of Managing Directoron 1 January 2013. Geoffrey joined the Group from SwirePacific Ltd, where he was most recently an ExecutiveDirector of the Beverages Division and an Executive

Director of the Trading and Industrial Division. Geoffreywas previously a General Manager of SteamshipsShipping from 1989 to 1992 and a director of theSteamships Group between February 2006 and May2007. He has been with the Swire Group for 33 years.

In August 2012 Steamships also farewelled Edward Ruha,who joined the Group in 1991 and became FinanceDirector and Company Secretary in 2008. He made astrong contribution to the Groups financial andcorporate governance performance during his tenure.

Steamships welcomed Sean Pelling to the Group inAugust as Finance Director and Company Secretary. Seanwas previously a Finance Director in Africa with JamesFinlay Limited, a wholly-owned subsidiary of John Swire &Sons Limited.

On behalf of the Board I would like to acknowledge all3,742 employees across Steamships many divisions anddiverse locations. Their efforts and commitment in 2012have ensured the Group is well placed to meet thechallenges that lie ahead.

WL RotheryChairman

Steamships Trading Company Limited8

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PNG has enjoyed several years of strong economicgrowth, driven largely by high commodity prices,structural reforms and sound macroeconomic policies.Economic expansion continued in 2012, at an estimatedrate of 8 per cent, despite the impact of a stronger Kinaand weaker international commodity prices, whichresulted in lower than expected government revenueand rural incomes.

This was in the most part due to strong economicperformance in the non-mineral sector, led byconstruction and transport as development of the PNGLNG Project peaked and higher governmentexpenditure. The commencement of production at theRamu nickel and cobalt mine in late 2012 boosted outputin the mining sector and discounted the impact of acontinued fall in output from PNGs declining oil reserves.

Beyond PNG, the global economic recovery remainedstalled throughout 2012. Fiscal and banking difficultiespersisted in Europe and moderate slowdowns in thelarge emerging economies (Brazil, India, the RussianFederation and the Peoples Republic of China) ensuredglobal economic activity remained weak. TheInternational Monetary Fund (IMF), in its October 2012World Economic Outlook, revised its forecast for globalgrowth downward to 3.3 per cent in 2012, from a Julyforecast of 3.5 per cent. Growth in Developing Asia, aregional group that includes emerging economies suchas China, India, Indonesia and PNG is forecast to be 6.7%in 2012, down from 7.8% in 2011.

As a consequence of the global slowdown, Pacificeconomies experienced declines in export earnings fromagriculture, forestry and some minerals. The PNGeconomy, which is reliant on resource exports, has beenaffected more than others in the region. The PNGGovernment now expects a 2012 budget deficitequivalent to 1.2 per cent of GDP. The result reflectsdecreased revenues, particularly for gold and copper, andincreased government expenditures. Steamships wasnot immune to these impacts with the Groups LogisticsDivision experiencing volatility in charter activity andcargo volumes across the year. The Groupsmanufacturing arm, Laga Industries, also suffered from ageneral decrease in disposable income.

The PNG economy benefited from lower inflation in 2012with the expected headline rate averaging 4.1 per cent,down from over 7 per cent in 2011. The Kina appreciatedby 8.9 per cent against the US dollar and close to 10 percent against the Australian dollar in the first threequarters of 2012. In response to the lower inflation, theBank of PNG moved to ease its monetary policy stance inSeptember 2012, lowering its target interest rate from7.75 to 6.75 per cent.

Continued growth in the economy has led to furtherincreases in formal employment; the total level ofemployment in PNG increased by 7 per cent in the yearto September 2012. Excluding the mineral sector, thelevel of employment increased by 6.6 per cent.

Trade

Steamships is not an export business. However, theGroups performance is directly impacted by fluctuationsand developments in PNG trade because of its significantinterests in logistics, retail and manufacturing, and bychanges in the macroeconomic environment.

In 2012, foreign direct investment replaced the resourceexport sector as the main engine of growth in the PNGeconomy. According to the Bank of PNG, lowerinternational commodity prices for PNG exportsproduced a deficit in the balance of payments ofK868 million for the nine months to September 2012,compared to a surplus of K427 million in the same periodof 2011. The weighted average price of PNGs exportswas 16.2 per cent lower in the September quarter of2012, compared to the corresponding quarter of 2011.This included a 14.7 per cent decline in the price ofmineral exports and a 21.2 per cent decline in the price ofagricultural and marine product exports. Lower Kinaprices prevailed for all mineral and agricultural exports,with the exception of tea and marine products.

The stronger Kina coupled with lower commodity pricesreduced export revenues in 2012, lowering incomes andspending power in export industries. Cash crop farmersare often the hardest hit, as they generally cut productionwhen prices fall, lowering their income potential. This wasespecially true for PNG copra and coffee farmers in 2012,with declines in international prices matched by a

Directors Economic Analysis


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decrease in year on year sales. Prices for palm oil, PNGslargest agricultural export commodity, were down 26 percent in December 2012 compared to December 2011.Across the economy, total sales declined by 2.8 per centin the twelve months to June 2012. This was driven bydeclines in the mineral, wholesale, manufacturing,transportation, agriculture/forestry/fisheries, financial/business and other services industries, while the buildingand construction and retail industries recorded increases.

The impact of these declines was felt heavily bySteamships logistics businesses. Lower coffee volumesaffected the Groups transport operations in Lae and theHighlands region, while an overall reduction in thegrowth of commodity volumes affected tonnages carriedby the Groups coastal shipping operations.

In 2013, PNG will become more reliant on revenue fromresource exports and less on foreign direct investment, asconstruction of the PNG LNG project begins to winddown. Fortunately, growth in Japan, China and Australia,PNGs main trading partners, is expected to remain stable.This is likely to result in continued demand for PNGsproducts including gold, copper, nickel, petroleum, andforestry and marine products.

PROSPECTS AND CHALLENGES FOR 2013

After achieving one of the highest growth rates in theAsia-Pacific region in 2012, PNGs economic growth isforecast to slow markedly in 2013 to 4 per cent, beforerebounding to 7.5 per cent in 2014 as the PNG LNGproject begins exporting large volumes of LNG to China,Japan and South Korea. In an economic briefing inDecember 2012, World Bank representatives in PNGpointed to short term difficulties in financing spendingpriorities because of slower, more heavily resource-driveneconomic growth, weaker public revenues and fewernew resource investments in the pipeline. Prospects formedium term growth are more encouraging. The IMF hasforecast GDP growth of 20 per cent in 2015, when LNGproduction reaches full capacity, and an average annualGDP growth rate of around 5 per cent after 2018 as fiscal

revenues from the project begin to flow. LNG-relatedgovernment revenues are projected to grow to around10 per cent of non-mineral GDP at their peak in 2024.

While economic growth is positive, it is an unhappy factthat PNG continues to perform poorly on importantsocial indicators related to health, education and poverty.In 2011, life expectancy at birth in PNG wasapproximately 63 years, while the average PNG childreceived just six years of schooling. Between 1980 and2011 per capita GNI2 increased by just 20 per cent. At aregional level, some PNG provinces continue to rankamongst the lowest in the world on universally acceptedindicators for human development.

The PNG Government has sought to address thesechallenges in the 2013 Budget. The proportion ofexpenditure allocated to health, education, infrastructureand law and order has grown from less than 20 per centof total expenditure in 2007 to an estimated 31 per centin 2013. Key initiatives include the Governments freeeducation and health policies and an increase in policeforce numbers. Steamships commends the governmenton its commitment to address problems including pooraccess to nutrition for children, high maternal mortality,exposure to violence and to improving literacy andaccess to schools for younger Papua New Guineans. TheGroup is proud to support the PNG Government in theseendeavours, both directly through our variouscommunity programs and indirectly through the efficientprovision of essential goods and services, localemployment and the distribution of wealth in the form ofwages and payments for services.

Fiscal challenges

Fiscal challenges lie ahead for the PNG Government. TheK13 billion 2013 national budget, which calls for a 23 percent increase in nominal expenditure, will beaccompanied by a significant slowdown in governmentrevenue growth and only modest growth inconsumption, income and corporate taxes. The budget is projected to create a fiscal deficit of K2.6 billion

Directors Economic Analysis (continued)

11ANNUAL REPORT 2012

2 This is a measure of the market value of all officially recognised final goods and services produced within a country (GDP) plus netreceipts from abroad of wages and salaries and of property income, divided by mid-year population.

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(7.2 per cent of GDP) in 2013, and K2.3 billion in 2014,before returning to balance in 2015.

The Bank of PNG Governor, Loi Bakani, has warned thatthe historically large fiscal deficit and projected inflationof 8 per cent are major concerns given the currenteconomic environment. Expenditure plans will have tobe carefully managed if the PNG Government is toachieve its goal of macroeconomic stability in themedium term. Sound implementation of monetarypolicy is also required to ensure price stability ismaintained.

As well as increasing expenditure in priority developmentsectors, the 2013 budget includes an 87 per cent increasein funding for the provincial and district levels ofGovernment. This represents a positive shift in theNational Governments approach to service delivery inrural areas.

Increased expenditure should improve developmentprospects, especially in the poorest areas, and help tocounter falling domestic demand. However, theGovernment must ensure that the increase inexpenditure translates into tangible improvements in thequantity and quality of service delivery. This will be mostdifficult at the sub-national level, where government hashistorically struggled to fully implement tangible publicservices.

Ongoing capacity constraints

Great strain will continue to be placed on PNGs transportinfrastructure as the country ramps up resource exportsin the coming years. These problems undermine theefficiency of Steamships supply chain and limitproductivity. In particular, deteriorating road conditionsalong the Highlands Highway have had a detrimentaleffect on Steamships road transport business.Congestion at PNGs major ports, particularly the Port ofLae, impedes the Groups coastal shipping operations.Failure to improve transport infrastructure createsbottlenecks and deteriorates service delivery, hampering

long term economic development and increasingbusiness costs.

Increased business costs place constraints on industry,particularly non-minerals industries which find it difficultto compete with the gas and minerals industry. While thewinding down of construction on the PNG LNG projectshould help alleviate some resources shortages,particularly labour, it will also slow growth in related non-minerals industries such as transportation andconstruction related services.

Strong global demand for PNG exports will be reflectedin a strong Kina which will continue to create challengesfor growth in non-mineral export related industries.Continued investment in the non-minerals economy iscritical to promote broad-based growth and to minimisethe damaging effects of Dutch disease.3

The 2013 National Budget commits an extra K12 billionover five years to nation-building infrastructure. Therefurbishment and building of new roads, highways,ports and airports will aid the PNG economy byimproving access to markets and reducing transportationcosts.

Importantly for Steamships and other logistics providers,work on the K700 million Lae port expansion andredevelopment project has progressed well sincecommencement in 2012. The project, which is beingfunded 70 per cent by the Asian Development Bank(ADB) and 30 per cent by the National Government,involves the construction of new port facilities includinga tidal basin, a berth and a terminal. The ADB believes thenew facilities will be fully functional in 2015.

Distributing the benefits of the boom

While an increase in infrastructure capacity helpsminimise the impact of Dutch disease, costs across theeconomy must be lowered and loose monetary settingsmust be avoided to mitigate the appreciation of theexchange rate and inflation. The creation of SovereignWealth Funds (SWF) foreign currency denominated



3 A phenomenon where an increase in the exploitation of natural resources leads to a decline in other sectors of the economy, such asmanufacturing and agriculture.

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assets is a key policy measure of the PNG Government.This strategy aims to sterilise foreign exchange inflowsand reduce upwards pressure on the exchange rate,thereby reducing the PNG budgets underlying exposureto external forces. The SWF will capture wealth today forfuture generations.

According to plans for the SWF, government tax revenueswill be saved in a stabilisationfund, while dividends fromlarge resource projects, including the PNG LNG project,are to be spent through a development fund. Thechallenge for the PNG Government is to ensure thatthese revenues are invested in projects that generatebroad-based, long term economic development and arenot expended on short term operational requirements.The creation of legislation that guides spending from theSWF is an immediate priority given LNG dividends willstart to flow in 2015.

Improving PNGs business climate

Papua New Guinea remains a challenging place to dobusiness according to global rankings. In 2012, PNGranked 104 out of 185 economies on the World Banksannual Ease of Doing Business index. While it performedadmirably on some indicators including gettingelectricity and protecting investors, PNGs overallranking was influenced by particularly poor results inareas influenced by regulation and related to investorcertainty (starting a business, dealing with constructionpermits, registering property, enforcing contracts). Thesefindings show how onerous regulations, costly taxes,corruption and ineffective public institutions candiminish productivity and increase sovereign risk. Toencourage wider economic development PNG policy-makers need to create an environment which supportsthe development of local business and attracts foreigndirect investment.

Corruption and the abuse of public funds have thepotential to undermine Government programs and deterinvestment. Recent progress in this area has beenencouraging. PNGs Investigation Task Force Sweep wasestablished by the National Executive Council (NEC) in

2011. Led by members of the Department of Justice andthe Police Force, the taskforce has been empowered toinvestigate, prosecute and recover the proceeds of crime.In 2012 it registered 174 complaints about corruptionand investigated 52 cases involving amounts totallingapproximately K2.162 billion.

Prime Minister ONeill has warned that maintainingproductivity is one of the most important economicchallenges facing PNG. He pointed to the multibillionKina cost blowout at the PNG LNG project as an exampleof the detrimental impact of rising costs. Measures thatlift productivity will ensure the economic viability ofenergy and resource projects and generate a morefavourable operating environment for companies likeSteamships.

Privatisation, when accompanied with a pro-competitivelegislative framework governing the operation ofprivatised entities, is a proven strategy to improvecompetitiveness, promote efficiency and encourageinvestment. The ongoing success of Bank South Pacific,which was established from the privatisation of the PNGBanking Corporation in 2002, shows how privatisedenterprises can produce better returns and services andmake prices more competitive. Privatisation ofenterprises such as Air Niugini, PNG Power, Telikom PNGand the PNG Harbours Boards, which were considered inthe past, would also deliver significant increases inproductivity in the PNG economy.

In late 2012, Prime Minister Peter ONeill announcedplans to establish an independent ProductivityCommission to advise the government on making theeconomy more competitive. He also committed to awide-ranging review of the PNG tax system anddedicated efforts to speed up the approval process forlarge-scale development projects. Funding for the firststage of the tax review is included in the 2013 Budget.Steamships is wholly supportive of these efforts; a morecompetitive taxation regime will enhance both foreignand local investment, as well as generate a moreproductive and efficient economy.


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Steamships has had a successful year, with consolidatedGroup profit after tax increasing by 12 per cent to K178million. This result included the profit on sale of aproperty of K48 million (prior year K12m) and aninvestment impairment of K25 million (prior year K7m);adjusting for these means the Group recorded a marginalgain in profit after tax.

In the Logistics category, Steamships Shippingperformed satisfactorily in 2012 continuing to capitaliseon a buoyant market, albeit with a general slowdown asa result of the PNG National Elections, held in June.Consequently, project cargo and charter activity duringthe mid-year period was lower than expected, butimproved in the latter part of 2012. Coastal liner tradevolumes held steady.

Steamships JV Stevedoring businesses had a respectableyear in 2012, fuelled by continuous activity at most ofPNGs major ports. The companies handled the highestvolume of cargo in PNG history for the second yearrunning, moving close to 2.5 million tonnes andsurpassing last years record of 2.3 million tonnes.Improved efficiencies in the management of the business

and a robust training program have led to a 60 per centincrease in productivity across all ports and strengthenedrelations with customers, as well as the PNG PortsCorporation.

Steamships Shipping Agencies had a reasonable yearmainly driven by a focus on container detentioncollections. However, in 2012 it was decided that theprovision of agency services was not a core functionalityof the Logistics division and consequently the agencybusiness was transferred to the China NavigationCompany Pte Limited (trading as Swire ShippingAgencies) with effect from 1st January 2013. This willresult in a loss of contribution of approximately K1.5million.

Consort Express Lines experienced a challenging year in2012. Expected growth in tonnage did not materialiseand consequently the division only achieved modestgrowth. The coastal shipping business was the hardest hitwith total recurring tonnage decreasing as a result ofincreased competition and low agricultural commodityprices. Both PNGs National Elections and a significantreduction in the coffee crop year on year reduced growth

Directors Review

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Directors Review (continued)


in total coastal volumes. The corresponding fall inrecurring revenue and an increase in fixed costs, createdlargely by an intensive dry docking program, resulted in aweaker year for 2012.

In contrast, Consorts associates performed very well andmade a significant contribution to Consorts final 2012result. In particular, Riback Stevedoring benefited fromthe growth in cargo volumes to Lae during theconstruction phase of the PNG LNG project, as well as asuccessful diversification into complementary depotservices.

East West Transport performed better in 2012, recordinggood year on year growth in revenue and market shareacross all operations, but more importantly improved thequality of its earnings through targeted key accounts.Depot operations in Lae and Port Moresby showedsignificant growth on the back of key contracts forhaulage, equipment hire and depot-related storageservices. Fuel volumes remained strong, particularly withthe LNG project-related haulage in Port Moresby, butwere lower across the outer port operations. Projecthaulage of reagent chemicals to the Hidden Valley mine

site was strong throughout the year. The business wasagain forced to manage a number of operationalchallenges in 2012, particularly related to business alongthe highlands highway which has seen deterioratingroad conditions and an increase in road users.

The Property & Hotels category performed well in 2012.Pacific Palms Property recorded solid year on yearrevenue growth and continued to successfully capitaliseon PNGs ongoing property boom. The Groupscommercial and residential properties throughout PNGincreased their occupancy rate to 98 per cent in 2012,excluding projects under construction. Pacific PalmsProperty completed a range of developments during2012, including three warehouses at Walter Bay in Badili,East West Transports bond store at Baruni, and in earlyJanuary 2013 completed eight Captain Fitch townhousesat Ela Beach in Port Moresby.

Coral Sea Hotels experienced a year of consolidation anddebt reduction in 2012, however, did not achievebudgeted growth in revenue per available room,especially in its new flagship hotel, the Grand Papua.Business confidence and corporate guests returned after

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Directors Review (continued)

17

number of consolidated jobs than previous years and

recording only modest year on year revenue growth.

Colgate-Palmolive (PNG), a manufacturer of personal and

home care products, had a stronger year, with

performance buoyed by increased demand for consumer

goods and relatively firm margins.

Steamships continues to invest across the Group. A

number of key projects are set to impact on Group

performance in the 2013 to 2015 period. Steamships

commenced various industrial, commercial and

residential property developments in 2012 in Port

Moresby, Lae and Madang with capital commitments of

K121 million. These projects will cement the Property

Divisions position in the market. Further it is expected

that a three-year redevelopment of the Hotel divisions

Melanesian Hotel will commence in 2013 at an expected

cost of K110 million, with a view to capitalising on Laes

growth as the industrial hub of PNG. The Shipping

division has also committed to a new build, a sister

to the Kopi Chief, with a further committed spend of

K10 million.

the elections, with the business reporting strong overalltrading in the latter part of 2012.

In the Commercial category, Laga Industries experiencedsome challenges in the first half of 2012, but recovered torecord year on year revenue improvement overall.Growth was driven by a continued strategic focus onenhancing distribution channels, improving operatingefficiencies and strengthening marketing efforts for keybrands.

Datec registered high demand for most business lines in2012. Although revenues were higher than 2011, profitswere slightly down due to the completion of a majorservice contract during the year. In a significantdevelopment, Datec was awarded an internationalgateway licence in 2012 and is now able to provide directhigh quality internet services via international suppliers.Datec also completed construction of next generationISP infrastructure, which will provide customers withmore affordable, reliable and faster internet access.

Steamships has two major joint venture companies inwhich it holds an interest. Pacific Towing, a marinetowing business, had a challenging year, securing a lower

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Logistics

The Kopi Chief, Steamshipsnewest vessel, joined the fleetin October 2012. The vessel was designed and builtaccording to the highest safety, accommodation andenvironmental standards. Safety features include theability to operate safely on one engine, spare generatorcapacity to ensure that the vessel and its cranes may stillbe powered if one generator is out of service, and bowthrusters for safer and easier manoeuvrability.Furthermore, the Kopi Chief is the first fully double-skinned landing craft in PNG, thus meeting the moststringent of environmental standards.

Steamships Marine Engineering Services (MES), thedivisions ship repair facility, offers dry-docking of vesselsup to 45 metres in length and 500 tonnes in weight. MEShad a busy year in 2012, catering to merchant vessels, aswell as servicing fishing vessels, ferries, landing craft andrecreational boats. Improvements in MES safetystandards were a key focus throughout the year.Improved margins and results are expected in 2013.

Steamships Shipping has teamed up with strategicpartners to establish a Centre of Excellence at theMadang Maritime College to offer progressive safetytraining courses to all seafarers in the fleet. The divisionunderstands that an ongoing commitment to staffdevelopment is vital to maintaining sufficient numbers ofprofessionally trained and qualified employees in thisgrowing PNG industry.

Steamships JV Stevedoring businesses had a respectableyear in 2012, fuelled by continuous activity at most ofPNGs major ports. In total they handled the highestvolume of cargo in PNG history for the second yearrunning, moving close to 2.5 million tonnes andsurpassing last years record of 2.3 million tonnes.Improved efficiencies in the management of the businessand a robust training program have led to a 60 per centincrease in productivity across all ports and strengthenedrelations with customers, as well as the PNG PortsCorporation with whom the business has worked closelyfor the operation of their mobile harbour cranes andrubber-tyred gantries.

As representatives for several international lines,Steamships Shipping Agencies has served as a link


STEAMSHIPS SHIPPING

Steamships has been a leader in coastal shipping in PNGsince 1919. Through its Steamships Shipping division, theGroup today operates a fleet of 18 coastal vesselsdesigned for shallow water and river passage, with safetyand technical specifications maintained to internationalstandards. The fleet includes landing craft, bulk carriers,tankers, tugs and barges. While the division specialises inriver shipping, it also has seven vessels fully certified forinternational trading, which regularly operate charters toAustralia.

Steamships Shipping provides short and long term vesselcharters, as well as reliable scheduled cargo liner servicesto the shores and rivers of the Gulf of Papua. It alsodevelops, implements and supports intermodal logisticssolutions linked to land based services such as roadtransport, cargo handling, storage, agencies, customsclearance, lay down areas and warehousing.

In addition to owning vessels, Steamships JV Stevedoringbusinesses offer a full range of stevedoring and handlingfacilities. They operate in the ports of Port Moresby, Lae,Oro, Madang, Kimbe, Kavieng and Kiunga. With a newfleet of specialist equipment the businesses handle alltypes of containers, as well as project cargo, break-bulk,RO-RO, LO-LO and grains. Local trucking businesses arealso operated at several locations. The stevedoringcompanies are joint ventures between Steamships andlocal landowner groups at the respective ports. Each jointventure employs a local workforce and is structured in amanner so that earnings are able to filter back into thecommunity.

Performance in 2012

Steamships Shipping performed satisfactorily in 2012,despite a general slowdown in project cargoes andincreasing competition. Project cargo and charter activityduring the mid-year period was lower than expected, butimproved in the latter part of 2012. Cargo volumesthrough PNGs major ports were strong throughout theyear and coastal liner trade volumes increased,generating increased business for the stevedoring andagency divisions.

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Logistics (continued)


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between PNG and global economies using a diverse fleetof vessels, with 2012 a year of internal businessimprovement and development for these businesses.

Following a review of operations, Steamships Shipping willdiscontinue all but one of its agency operations in PNGand with effect from 2013 these are being operated byChina Navigation Company Pte Limited using the globalbrand name Swire Shipping Agencies.

Aims for 2013

Health and Safety Initiatives

The continued development of a strong safety culture isa priority for 2013. Steamships Shipping is focused onproviding and maintaining a safe work environment thatminimises health risks for all employees. The division iscommitted to planning and managing activities whichassess and eliminate accidents and hazards. A number ofinitiatives have already been planned for 2013.

Management of Human Resources

Steamships Shipping is committed to maximising thepotential of its human resources. Recruiting, developing,training and promoting Steamships people, both at seaand ashore, are key priorities in 2013. The division hasplanned a number of programs for next year, designed toimprove its human resource capital and to encouragepersonal and professional excellence.

Fleet Expansion & Renewal

Steamships Shipping will continue to acquire newtonnage and replace older vessels in the coastal fleet inaccordance with its long term growth and renewalprogram. A sister to the Kopi Chief is due for delivery inmid 2013. By lowering the age and risk profile of the fleet,the division will improve safety standards and ensure thatit has the necessary capacity to meet the growingdemand for shipping services from the resourceindustries and general commercial customers. Thedivision will also focus on updating and standardising theSteamships JV Stevedoring fleet of materials-handlingequipment to further increase productivity.

Improved Efficiencies

Improving efficiencies across Steamships JV Stevedoringbusinesses is a priority in 2013 and beyond. Measures

aimed at optimising operations and minimising costsand losses through injury and damage were put in placein 2012 and will continue to develop in 2013.

Strategies to improve efficiencies in asset utilisation willbe considered. The division is also investing in a new ITmanagement system, Cargo Pro, in order to improvestaff management, invoice accuracy and efficiency anddebtor settlement in all Steamships JV Stevedoringbusinesses.

Developing New Business Opportunities

Over the next 10 years PNG is expected to experiencecontinued economic growth, leading to more disposableincome and increased opportunities for coastal shippingin areas outside the major population centres of PortMoresby and Lae. Steamships Shipping aims to capitaliseon this growth by developing integrated logisticssolutions, which utilise the divisions strong serviceofferings in coastal shipping, stevedoring and marineengineering services.

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CONSORT EXPRESS LINES

As a complementary business to Steamships Shipping,Consort Express Lines Limited (Consort), established in1978, provides scheduled coastal shipping services in thewider PNG archipelago. The division currently providesthe most comprehensive network of scheduled linershipping services in PNG. Operating from its hub in Lae,Consort connects 15 ports throughout the country andprovides an international service to Townsville, Australia.The division has scheduled services to the North Coast(Madang, Basamuk, Wewak, Vanimo), South Coast (PortMoresby, Oro Bay, Alotau), New Guinea Islands (Kimbe,Rabaul, Kavieng), Bougainville (Buka, Kieta), Australia(Townsville) and, beginning in 2012 through linkageswith Steamships Shipping, Western Province (Daru,Kiunga). Consort proudly serves the people of PNG byproviding the sole supply link to many of thecommunities on its routes.

Consort owns and operates a fleet of nine geared, multi-purpose vessels (PNG flagged and manned) with allsafety and technical specifications maintained accordingto international standards. The division can carry a rangeof cargoes including containerised, break-bulk, reefer, LCLand project cargo. Consort transports cargo for a diversecustomer base from domestic manufacturers andwholesalers to international liner carriers transhippingcargoes to outports.

In addition to owning and operating ships, Consortprovides complementary depot services to customers atthe Lae hub (including bond yard, container storage,washbay facilities) and is a shareholder and manager offive stevedoring operations at five PNG ports (RibackStevedoring, Lae; United Stevedoring Limited, Lae;United Stevedoring Limited, Port Moresby; MakerioStevedoring, Buka; Nikana Stevedoring, Kieta). Thesestevedoring companies are partnerships betweenConsort and local landowner companies and providesignificant employment opportunities for the nearbycommunities.

Performance in 2012

Consorts shipping services experienced a challenging

year in 2012. Expected growth in tonnage did notmaterialise and consequently the division only achievedmodest growth. The coastal shipping business was thehardest hit. Total recurring tonnage decreased, as a resultof increased competition and low agriculturalcommodity prices and volumes, which reduceddisposable income and suppressed demand forconsumer goods in New Britain and Bougainville. Thecorresponding fall in recurring revenue and an increasein fixed costs, created largely by an intensive dry dockingprogram, resulted in lower profits for 2012.

In contrast, Consorts depot services and JV StevedoringAssociates performed well and made a significantcontribution to Consorts final 2012 result. The mostnotable performance was Riback Stevedoring, whichbenefitted from the growth in cargo volumes to Laeduring the construction phase of the PNG LNG project, aswell as a very successful diversification intocomplementary depot services.

Expanded Services

Consort responded to customer demand by launchingfixed day sailings to three ports (Port Moresby, Madangand Wewak) in March 2012. These were facilitated by theadditional capacity provided by the dredging of thecoastal berth at Lae port (allowing all ships in the Consortfleet to call, which permitted improved cycling of ships inthe congested Lae port) and the addition of a ninthvessel to the fleet. In February 2012, Consort took deliveryof MV Nakanai Coast (5280dwt), a sister ship to threevessels already in the fleet.

In addition, Consort added two new ports to the networkduring 2012, offering customers direct shipments toKiunga and Daru via a slot arrangement with SteamshipsShipping.

Investment

Consort took delivery of 1,500 new 20 dry containers, 100new 20 reefer containers and 180 new 40 containers in2012. These investments replaced ageing stock, providedadditional capacity for expected growth and ensure thatConsort continues to provide customers with the mostreliable products available.

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Consort also invested in existing depot services andlaunched new services, including a new bond yard andwashbay, during 2012. A new IT management systemwas introduced to improve the efficiency of depotoperations.

Training

Consort offered 14 scholarships for the Consort ExpressLines PNG Officer Cadetship Program in 2012. Establishedin the 1980s, these scholarships offer high performingPNG nationals a structured, four-year training anddevelopment program. A combination of at sea (onboarda vessel in the Consort fleet) and onshore training (at thePNG Maritime College, Madang) is provided for deckofficers and engineers.

Together with Steamships Shipping, Consort has alsopartnered in the establishment of the Madang Centre ofExcellence.

Aims for 2013

Improving Efficiencies

Improving the efficiency of operations will be a key focusin 2013 and beyond. Port congestion, particularly at thehub port of Lae, has been a significant issue. Consortplans to manage this by reorganising its shippingschedule to build in time buffers and prioritise serviceson competitive trades, together with potential strategicalliances.

In addition, Consort plans to invest in a trucking fleet inPort Moresby during 2013. This will provide a reliable landtransport service. The divisions Lae depot will also beredeveloped to provide better efficiencies and newopportunities for growth.

Closer cooperation with selected strategic partners andnew management appointments will all contribute toefficiencies in the business in 2013. These measures willfurther assist Consort in providing the best value, mostsustainable and reliable cargo transport services in PNG.

Business Development

A fixed day sailing to the port of Rabaul will be launchedin 2013 and various other new routes will be pursued topreviously unserviced PNG ports. Various resource sector

strategic partnerships are being pursued to sustain theAustralia service and expand depot operations. Agencyand stevedoring services will also be developed inVanimo.

Capital Investment

Consort will review tonnage in 2013 and propose acapital investment plan to maintain a viable asset base ofvessels and operating equipment.

EAST WEST TRANSPORT

East West Transport (EWT) is one of Papua New Guineaslargest multifaceted transport and logistics companies.Based in Lae, it also has a significant presence in PortMoresby, Goroka, Wewak, Madang, Rabaul, Kavieng andMount Hagen. With 770 employees, the division has agrowing fleet of 144 prime movers, 46 heavy trucks, 9light trucks and 49 forklifts. All of these are supported bydivision workshop facilities, safety and emergencyvehicles and an in house training centre.

EWT operates across a wide spectrum of transport-related activities including bulk fuel, containerised grain,coffee, break-bulk cargoes and depot services such asequipment hire, warehousing, and yard storage. EWT alsooffers a licensed customs cargo clearance service in Laeand Port Moresby as well as operating a large exportcoffee processing facility in Lae. The division capitaliseson its close relationships with sister companies inshipping and stevedoring by offering specialised projectsolutions for the mining, oil and gas sectors.

Performance in 2012

EWT performed better in 2012 recording strong growthin revenue and market share across all operations, butmore importantly improved the quality of its earningsthrough targeted key accounts. Depot operations in Laeand Port Moresby showed significant growth on the backof key contracts for haulage, equipment hire and depot-related storage services. Fuel volumes remained strong,particularly with the LNG project-related haulage in PortMoresby, but were lower across the outer portoperations. The Exxon Mobil bulk cartage contract wasrenewed for an additional three years in Port Moresby,

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ANNUAL REPORT 2012


23

Lae and Madang after a successful operations integrity

management system (OIMS) compliance audit earlier in

the year.

Project haulage of reagent chemicals to the Hidden

Valley mine site was also strong throughout the year. With

projected mine expansions in the Morobe and Madang

provincial area, EWT is positioning itself to take advantage

of an anticipated growth in demand for specialised

transportation. Ensuring compliance with international

standards, a supply of fit for purpose equipment and a

team of thoroughly trained and capable staff are all

ongoing priorities.

The division was also pleased to announce thedevelopment of a joint venture partnership in West NewBritain province during 2012. This venture will encompassa wide range of transport and related services.

The EWT fleet continued to grow in 2012 and nowconsists of prime mover and flat deck truckcombinations, light vehicles and a wide range of trailersto cover all requirements for metro, highway and minesite haulage. Materials handling equipment alsoincreased significantly with the addition of two emptycontainer handlers at the Port Moresby depot and threereach stackers at the Lae depot for container and heavybreak-bulk handling.

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All mobile equipment additions to the fleet have beensourced from China, while trailers continue to besupplied from Singapore. The Company now has 61Chinese trucks in the fleet and additional new andreplacement fleet purchases are planned for 2013. Thesetrucks will predominantly service metro operations, while14 will be added to the Highlands Highway fleet.

During 2012 EWT invested in Depot Pro (yardmanagement computer software) and will capitalisefurther on this in 2013 to enhance its logistics solutionsdelivery. In conjunction with Pacific Palms Property, EWTalso took up a new racked warehouse facility at Baruniduring the year that has expanded its logistics offering.

EWT managed a number of operational challenges in2012, particularly in relation to its business along theHighlands Highway. Deteriorating road conditions andan increase in road users due to the PNG LNG project ledto added difficulties. The use of B-Double configuredtrailers was not possible due to road conditions and thisis unlikely to change in the foreseeable future.Furthermore, the 2012 coffee harvest was significantlylower in volume than 2011s unprecedented coffeeseason. These issues led to lower than expected revenuesin this area of the business and a slow recovery hascontinued into the early stages of 2013.

Aims for 2013

There are indications that 2013 will be a challenging year.The winding down of construction at the PNG LNGproject will see an increase in available tonnage capacityin the Morobe and Highlands regions and thus increasedcompetition for business. EWT plans to meet thischallenge by providing superior levels of service and abroader range of service offerings. Maintaining key long-term contracts is vital to the wellbeing of the businessand the division continues to develop integrated logisticsservices for all customers, large and small.

The development of business on the Highlands Highwaywill be a key focus in 2013. The acquisition of more robust

highway trucks commenced in 2012 and the division isinvesting in a live cargo and equipment tracking system,which will be established across the Lae, Goroka and MtHagen depots. Warehousing in these areas will bedeveloped with capabilities modelled on themultifaceted Port Moresby operation.

Improving Efficiencies

Improving the efficiency of operations will be a priorityfor EWT in 2013. The division is committed to developingseamless links between wharf, customs, warehousing,local depot and highway operations, including bondedand fumigation facilities where required. It will alsodevelop a national integrated container and break-bulktracking system to improve performance. A strong focuson the quality of contracted and integrated services willcontinue through into 2013.

Business Development

EWT will focus on optimising current service offerings,while investing in new, diversified services in 2013.Ensuring reliable fit for purpose and efficient equipmentoptions for cargo handling and haulage services will be apriority. The division will further develop empty containerdepot operations along with associated services such ascontainer repairs and washing facilities. It will also targetcontinued growth in equipment rental and otherdiversified services, including waste management, bustransport services and crane hire for larger corporateclients.

Investing in People

EWT will continue to develop health safety, security andenvironmental standards for all staff, with a particularfocus on compliance with ISO standards. Staff training inadministration and technical trades will continue toimprove, while the acquisition of a driver simulator,supported by a national training manager, will increasethe scope of the EWT training program. In-house trainingwill also continue to be provided by key suppliers.


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Property and Hotels

PACIFIC PALMS PROPERTY

Pacific Palms Property is one of the largest and mostdynamic property developers in PNG. The divisionprovides residential, commercial, retail and industrialproperty throughout the country. The division wasoriginally established to manage the Steamships Groupsinternal needs, although today over three quarters of itsbusiness is conducted with external clients.

Today Pacific Palms Property focuses on two separatestreams of business activity. Its development teammanages land acquisition, investment assessment andconstruction management, whilst its lettings teammanages marketing, tenant placements, rentalcollections and property maintenance. Building and landassets are located in Port Moresby, Lae, Madang, Wewak,Goroka, Mt Hagen, Popondetta and Rabaul. The divisioncurrently holds a total lettable space of 14,837m2 ofcommercial property, 180,837m2 of industrial property,18,904m2 of retail property and 18,904m2 of residentialproperty (comprising 108 units in total).

Performance in 2012

Pacific Palms Property had another successful year in 2012,recording solid year on year revenue growth. The divisioncontinued to successfully capitalise on PNGs propertyboom, benefiting from continued high rental yields andoccupancy rates in major commercial centres across thecountry. Papua New Guineas construction sector overallhas enjoyed 18 per cent growth since 2007 and is nowone of the economys largest contributors to GDP,although there has been a cooling off in the residentialmarket due to recent increases in capacity. Despite this,Pacific Palms properties throughout PNG increased theiroccupancy rate to 98 per cent in 2012, excluding projectsunder construction.

Pacific Palms Property had a range of developmentsongoing during 2012.

In its Residential category, construction of the divisionsprestigious Windward Apartments continued with stage 2comprising 40 luxury executive apartments scheduled forcompletion in 2013. Work on the 12-unit Blaikie Apartmentcomplex located in Lae is also due to complete in 2013.

The eight Fitch Townhouses, named after the founder ofSteamships and overlooking Ela Beach in Port Moresbywere completed and occupied in January 2013.

In its Retail category, construction of the 5,300m2 SVSsupermarket and commercial complex in Lae and the9,300m2 Waigani Central Development incorporating thenew Stop n Shop supermarket and Paradise Cinemacomplex in Port Moresby are both due for completion atthe end on 2013.

In its Commercial category, construction of the 18,800m2

Harbourside Office complex commenced in April 2012.This will be the first Green Star rated building of its kind inPapua New Guinea and is due for completion in January2015. Pre-leasing of this high quality waterfront propertywill commence in 2013.

In its Industrial category the division completedconstruction of three warehouses at Walter Bay in Badiliand EWTs bond store at Baruni. Further development ofBaruni stage 3 comprising a 3.3 hectare subdivision isunderway and construction of a new estate in Madangincorporating 12 mixed-use tenancies commenced inDecember 2012.

Aims for 2013

Developments

Looking ahead, Pacific Palms Property anticipatescommencing the construction of eight warehouses at SixMile in Port Moresby, the Huon Industrial & CommercialCentre in Lae, a joint venture retail development inMadang and further development of the Baruniwarehousing.

Land Acquisition

Property and land acquisition face a challenging marketwhere prices have increased to high levels over the lastfour years. While Pacific Palms Property will continue toacquire strategic properties to add to its significant landbanks in Port Moresby and Lae, current marketconditions, coupled with capacity constraints brought onby PNGs land tenure system, have made this difficult inrecent years. To this extent Pacific Palms Property will beconsidering possible joint venture arrangements withother major property owners.

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Steamships Trading Company Limited

Property and Hotels (continued)

26

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ANNUAL REPORT 2012 27

Property and Hotels (continued)

CORAL SEA HOTELS

Steamships Hotel division is known in PNG by its tradingname, Coral Sea Hotels. It operates nine hotel andapartment complexes offering full hotel facilities andserviced apartments as well as extensive meeting,conference and banqueting facilities.

Coral Sea Hotels is the largest and most geographicallydiverse hotel group in PNG. Today it offers a total of 626hotel rooms and 135 apartments in PNGs majorcommercial centres. The group of nine hotels comprisesthe Grand Papua Hotel, the Ela Beach Hotel, WhittakerApartments and Gateway Hotel and Apartments in PortMoresby; the Huon Gulf Hotel and Apartments andMelanesian Hotel and Apartments in Lae; the HighlanderHotel and Apartments in Mount Hagen; the Bird ofParadise Hotel and Apartments in Goroka, and theCoastwatchers Hotel in Madang.

Performance for 2012

2012 was a year of consolidation and debt reduction forCoral Sea Hotels. It followed a hectic period of expansionin which the Gateway, Ela Beach and Highlander Hotelsadded new rooms, restaurants and conference facilities.These facilities performed strongly in 2012 and havefurther strengthened Coral Sea Hotelsposition as a qualityprovider of accommodation and conferencing facilitiesacross the country.

It was a challenging year in many respects. Coral SeaHotels did not achieve budgeted growth in revenue peravailable asset, especially for the divisions flagship hotel,the Grand Papua Hotel. Business confidence andcorporate guests returned after the elections, with thedivision reporting strong overall trading in the latter partof 2012.

Establishing the Grand Papua as the leading five starinternational hotel in the country was the divisionsgreatest challenge in 2012. Nonetheless, by year endoccupancy levels had nearly reached budgeted figures.Occupancy rates will continue to improve as the Grand

Papua Hotel further establishes itself as PNGs benchmarkfor international service standards and product delivery.

Aims for 2013

Coral Sea Hotels expansion plans were further developedin 2012. A redevelopment of the Melanesian Hotel in Laehas been proposed, along with an expansion ofconference facilities and additional rooms in MountHagen, expanded staff quarters in Port Moresby, newfood and beverage concepts for the Gateway Hotel and ageneral upgrading of facilities across all hotels.

New opportunities for business growth are also beingconsidered. These include diversification into theprovision of budget accommodation in Port Moresbyand Lae, as well as the development of hotels in WesternProvince, which will capitalise on the growth of oil andgas exploration in that region.

Maintaining business levels in an increasinglycompetitive market will be a significant challenge forCoral Sea Hotels in 2013. The increased supply of hotelrooms and apartments, particularly in Port Moresby, hasincreased pressure on rates and occupancy levels. Thiswill continue into 2013.

To counter this market shift, the Coral Sea Hotels sales andmarketing team will be expanded. New marketingstrategies will be adopted, not only focusing on directsales, but also e-marketing and social mediaopportunities. The Coral Sea Hotels website will also beredeveloped to allow real time bookings and reservationsfor all hotels in the division. Existing relationships withtour operators, conference organisers and travel agentswill be strengthened.

As competition increases, the supply of skilled staff willcontinue to be a challenge across PNG. Recruitment,training and the retention of personnel remain keypriorities for the Group. Coral Sea Hotels is currentlyworking with international and local training providers toexpand its apprenticeship training program, to introducea new cadet management scheme and to ensure all staffwork in a safe and secure environment that offers careerdevelopment prospects and job satisfaction.

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Commercial

LAGA INDUSTRIES

Headquartered in Lae, Laga Industries is PNGs premierconsumer goods business and the countrys leadingmanufacturer of ice creams, vegetable oils, drinkpowders, condiments and spirits. The division is also adistributor for international consumer goods companiesincluding Diageo and Constellation Wines. Brandsinclude Gala Ice Cream, distributed from the Gala Parloursfound in most leading retail supermarkets, Laga andHighlands Meadow oils, Kools and Sunripe drinkingpowders, and Trade Winds spirits including popularready-to-drink (RTD) premixed drinks. Laga Industries alsobottles pure drinking water. Operationally, the divisionowns a plastics manufacturing plant and has a freezerand dry goods distribution facility in Port Moresby, withsales offices in Madang, Wewak, Goroka, Mt Hagen,Kimbe, Kavieng, Rabaul and Buka.

Performance in 2012

Laga Industries experienced some challenges in the firsthalf of 2012, but recovered to record year on yearrevenue improvement overall. Growth was driven by acontinued strategic focus on enhancing distributionchannels, improving operating efficiencies andstrengthening marketing efforts for key brands.

Expanded distribution systems were particularlyimportant for growth in the flagship ice cream category.Laga Industries ice cream cabinet placement programwas implemented in 2012, with the goal of placing icecream products within arms reach of desire for the PNGconsumer and now has a total of nearly 1,000 chestfreezers around the country. The program involved thecontinued expansion of Gala Parlours within major retailcentres, thereby improving brand visibility and the easein which consumers can access Gala products acrossPNG.

Laga Industries expanded upon this program inDecember 2012 with the launch of the mobile vendortrolley program in Lae and Port Moresby. These trolleysutilise eutectic plate technology; when the frozen platesare inserted into the trolley they maintain a temperaturethat allows the vendor to sell ice cream remotely for up to

eight hours. The division plans to distribute the first 60trolleys during the first quarter of 2013.

The divisions cooking oil products were affected bysignificant changes to the supply of bulk oil in PNGduring the year. Local producers of palm oil could onlysupply 10 per cent of requirements in 2012, with 90 percent of the required quality bulk oil sourced fromalternatives in Indonesia and Malaysia. Future growth willrely on ensuring its Highlands Meadow and Laga brandsremain competitive against increased supplies of cheap,imported bottled cooking oil, which began to arrive inPNG in late 2012. Improving efficiencies at the divisionsbottle manufacture and oil bottling operations isparamount.

Laga Industries beverages category continued to grow in2012, despite a year of liquor bans in a number ofprovinces due to the PNG general elections. RTDs andbottled water enjoyed solid growth, while two new spiritbrands were launched early in the last quarter: McInnisScotch whisky and Columbus dark rum, with repeatorders indicating both are making progress.

Concerns surrounding the erratic public power supplywere addressed in 2012, with investment in anuninterruptible power supply system. The system hasalready led to marked improvements in productivity andmachine downtime. Further investments were made toimprove the capacity of the divisions PET blow-mouldingplant for increased volumes of oil and water bottlerequirements, and for additional capacity to cope withgrowing powders and condiments volumes.

In a significant development, the divisions HACCPaccreditation was the subject of a site audit by ExxonMobil, which declared Laga Industries compliant to theinternational companys requirements to supply water toits employees.

Employee development and training at all levels was akey focus for Laga Industries in 2012 and will continue tobe so in 2013. The divisions supervisors attended anumber of courses throughout the year, including TimeManagement/Introduction to Supervision and How toManage People, both of which were conducted byexternal providers. Several senior employees were also


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Commercial (continued)

sponsored to complete appropriate tertiary courses,while various operating equipment manufacturersprovided training for key equipment operators atdivisional sites.

Aims for 2013

Laga Industries continues to support the governmentsefforts to encourage growth in the manufacturing sector.It welcomes the removal of impediments to business andthe reduction of regulatory burdens, the lowering ofimport tariffs and investment in land and transportinfrastructure. The division believes these reforms, whencompletely implemented, should help to reduce the costof business within the industry and spur continued,sustainable growth.

Whilst competition is increasing, Laga Industries hasstrength in its national reach and supply chaindistribution network, which enables it to maintain itscompetitiveness, especially in the ice cream category andthe highly competitive vegetable oil and alcoholicbeverages categories. Looking ahead, Laga Industries willdrive growth and build its brands through ongoinginvestment in expanded distribution systems,comprehensive strategic sales and marketing plans andthe efficient production of high quality products.

Distribution

Laga Industries is committed to the further developmentof its distribution spread through placement of additionalice cream fridges and vendor trolleys, together withstrategic placement of reefer freezers. Ready to drinkfridges will also significantly increase in 2013.

New Product Development

Laga Industries will be reviewing new premium ice creamstick lines, cooking oil and bottled water sizes, andbeverage offerings as well as development of the foodservice category.

Operating Efficiencies

A key focus for 2013 will be on preventative maintenanceand equipment replacement as the business continuesto grow, coupled with automation and increased stockturn initiatives.


DATEC

Datec (PNG) Limited (Datec) has been operating in PNGfor 27 years and is the countrys premier information andcommunications technology (ICT) company and InternetService Provider (ISP). Datec provides a suite of ICTsolutions to assist companies through the entire asset lifecycle, from sourcing equipment to technical support,authorised repairs, maintenance and retiring oldequipment. Datecs internet services are mainly deliveredto the corporate sector and the division offers the fastestinternet of any provider in PNG.

The business includes a data centre in Port Moresby, thelargest computer retail store in the country (the DatecMegastore) as well as corporate and degree-level trainingand education through the Datec Learning Centre (anaccredited academic certificate and diploma IT program).The ICT services provided cover network andcommunications, uninterruptible power supply (UPS),office automation and even software development.

Professional services backup is also a key part of thebusiness and Datec is an accredited warranty centre forIBM, HP, Acer, PowerWare, Lenovo, Apple and Canon. Inaddition, the division has developed a closed-circuit TV(CCTV) and cabling business that designs, installs andservices CCTV and electronic surveillance systems, as wellas full service project management capability. Corporatesector sales are driven by the corporate sales team, whilsthome users are catered for through the Datec Megastore.

Performance in 2012

Datec registered high demand for most business lines in2012. Although revenues were higher than 2011, profitswere slightly down due to the completion of a majorservice contract during the year.

The divisions primary focus in 2012 was to build ascalable platform in order to leverage future growth inthe small and medium business market, which meantensuring efficient delivery and servicing of the currentproduct range.

The division experienced growth in its training andeducation business in 2012 and has forecast another

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strong year in 2013. The Retail Megastore, UPS, CCTV,cabling and Canon Imaging businesses also experiencedgrowth in 2012, driven by improved inventorymanagement and stronger corporate relationships.

In a significant development, Datec was awarded aninternational gateway licence in 2012 and is now able toprovide high quality internet services via internationalsuppliers, bypassing Telikom PNG. Datec also completedconstruction of next generation ISP infrastructure during2012, which will provide customers with more affordable,reliable and faster internet access.

Aims for 2013

Datecs leading market position has given the division theconfidence to recruit and train local staff in both salesand technical support, which in turn has furtherstrengthened its competitive position. Looking forward,Datec plans to maintain its position as a market leader byinnovating, introducing new products and adding valuethrough its status as a warranty centre for major products.

The development and launch of the PNG Governmentsnational gateway network is set to provide customerswith an additional range of ISP services including metroarea Ethernet, cloud computing, domain hosting, disasterrecovery, virtual private server and dedicated physicalserver hosting. Datec is positioning itself to capitalise onthis.

The Datec Learning Centre is a nascent business which isincreasingly providing brand awareness and loyalty.Datec will continue to focus on its development asdemand for education grows in PNG.

Datecs retail operations will be expanded into theHighlands region in 2013 through new agencypartnerships. The divisions professional services offeringwill continue to focus on accredited warranty work, butwill increasingly provide a staff outsourcing solution tocorporate customers. This will secure a knock-onadvantage to other areas of the business.

Commercial (continued)


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Joint Ventures

PACIFIC TOWING

Established in 1977 Pacific Towing PNG Limited (PacificTowing) is a joint venture between Svitzer andSteamships Trading Company, in which Steamshipsmaintains a 50 per cent beneficial interest. Pacific Towingis headquartered in Port Moresby and provides specialistand interrelated services to the marine industry. Thesecomprise harbour towage and mooring services,terminal, and ocean towage, diving, salvage andemergency response services. The division operates 22vessels, including tugs and line boats, in five ports acrossPNG (Port Moresby, Lae, Rabaul, Kimbe and Madang).

Performance in 2012

2012 proved to be a challenging year for the division,which secured a lower number of consolidated jobs thanprevious years and recorded only modest year on yearrevenue growth.

Towage services were maintained at the key regionalports throughout 2012, with mixed volumes recordedacross the provinces. Peak traffic levels at Port Moresbyeased during the year, due to a noticeable reduction inshipping for the PNG LNG Project. This was somewhatoffset by an increase in volumes at the port of Lae.Towards the latter part of 2012 services were extended tothe Solomon Islands with the vessel, Turanguna,repositioned to Honiara.

There were few salvage opportunities in 2012, and nonew salvage contracts were secured. However, asuccessful outcome was achieved through arbitrationduring the second part of the year in connection with the2010 Hai Soon 5 salvage claim.

Commercial dive operations recorded a strongperformance after another busy year. Further divertraining courses in Australia are also scheduled for 2013.Accreditation for the provision of in-water class surveyswas maintained with leading IACS memberorganisations.

Aims for 2013

The age of the fleet, high maintenance costs anddifficulties associated with sourcing certified crew remaina concern for the business and will be addressed as keypriorities in 2013.

COLGATE PALMOLIVE (PNG)

Steamships Trading Company holds a 50 per centbeneficial interest in Colgate-Palmolive (PNG) Ltd(Colgate), a company that manufactures and distributesoral, personal, home, and fabric care products in PNG.Management control is exercised by Colgate-PalmoliveAustralia.

Performance in 2012

Colgate had a strong year in 2012, exceeding bothrevenue and margin figures from the previous year andagainst budget expectations. The division managed tocapitalise on the generally buoyant economy which hasincreased the demand for consumer goods. At the sametime Colgate has also leveraged the cost reductionsbrought on by changes in foreign exchange and PNGduty conditions to implement pricing adjustments in themarket.

The division developed and focused on two key strategicprograms in 2012. The first was aimed at buildingColgates key brands in PNG and included establishingprofessional and government endorsement for thesuccessful Bright Smiles Bright Future program forchildren and adults (BSBF/BSFA) and also the handhygiene program for personal care. The second, aninnovation growth strategy, involved the re-launch ofCold Power laundry powder with new enzymaticformulation, as well as improved brand activationcampaigns in alignment with emerging market priorities.

Aims for 2013

Looking forward, Colgate will continue to align its PNGoperations more closely with the Pan-Pacific region (Fijiand South Pacific island countries) and other emergingmarket operations to leverage synergies and bestpractices in all areas.


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Sustainability

SUSTAINABILITY: A MESSAGE FROM THE BOARD OFDIRECTORS

Sustainability to the Steamships Group representsa meaningful investment in our peoples future, afundamental commitment to the highest standardsof health and safety at work, practical efforts toimprove the lives of the communities in which weoperate and genuine measures to ensure weminimise any negative environmental impacts fromour diverse activities. Only by focusing on theseareas will Steamships be able to ensure that our longterm growth, along with the economic and socialdevelopment of Papua New Guinea, is trulysustainable.

In 2011 Steamships launched a comprehensivesustainability strategy, which focused the Groupscommitment to sustainable development andestablished mechanisms to improve the management ofits operational impacts.

A Sustainability Action Group was created to overseeinitiatives focused in three broad areas, Our People, OurEnvironment and Our Community. Key benchmarks weredeveloped in line with one of the leading globalstandards for sustainability reporting the GlobalReporting Initiative (GRI). Steamships staff were initiatedin data collection against these benchmarks and theGroup was able to report on initial progress inestablishing the new framework in the 2011 AnnualReport.

In 2012, the focus was on improving the sustainabilityprogram and embedding it in Steamships businesspractices. Plans and targets were revised, staff weretrained on monitoring procedures, reporting structureswere established and integrated into managementsystems, and awareness programs were implemented tohave buy in from all Steamships staff.

Inevitably there were teething problems. These arediscussed in greater detail in the following section. Thestrategy in 2012 was to address them in the early stagesof the programs development. The result is thatSteamships has now established a platform for accurateand reliable sustainability reporting which will benefit theGroup for years to come.

Steamships celebrated a number of sustainabilitysuccesses in 2012. Various new employee health, safetyand security initiatives were launched in areas such asfirst aid, drug and alcohol abuse, TB and malaria.Enhanced training and development programs ingeneral business skills together with health and safetywere a feature. Steamships successfully implemented itsGraduate Accountant Program during the year, launcheda Graduate Development Program and confirmed plansto launch a group-wide Management DevelopmentProgram in 2013. Two Steamships employees completedMasters Degrees in the UK under the CheveningScholarship.

A notable development was Steamships announcementin early 2012 of the inaugural recipient of the SwireConservation Scholarship in Forest Science andConservation. At the community level Steamshipsfunding was again significant, with over K1.6 millionprovided to worthy programs in health and socialwelfare, education, environment and sports.

Steamships sustainability strategy continues to grow andevolve. The Group remains steadfast in its commitmentto supporting the people it employs, bettering thecommunities in which it operates and reducing theimpacts it has on PNGs unique environment. It does sobecause it understands that its long-term business goalscan only be achieved if its business operations areimbued with the principles of sustainable development.

STEAMSHIPS TRADING COMPANY & THE GLOBALREPORTING INITIATIVE

Steamships utilises the Global Reporting Initiatives G3.1Guidelines as a framework for its sustainabilitymonitoring and reporting. Steamships has based itsreporting on a C level of application of the GRI indicators.

The 2011 annual report served as an introduction to theGroups sustainability initiatives and plans. Specific datawas not reported as management systems formonitoring and reporting were being established acrossthe Group. These systems were enhanced in 2012 and arestill being proven, particularly for reporting on energyconsumption, water and greenhouse gas emissions.Whilst the Group collected data against all selected GRIsin 2012, it became apparent that there were some


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full page pic (environment)

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Sustainability (continued)

deficiencies, which are being reviewed for correction. T

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